The Impact of Coworking on Real Estate and Commercial Leasing

With modern times comes the need for modern technology. A newer plan to replace the existing rigid structure of working from offices. The IT sector alone employs 2.8 million worldwide. Sectors like customer care for almost all products, the media industry, the banking sector, and any sector that requires a laptop and a desk setup. All of these sectors are the prime customers of real estate and commercial when it comes to leasing spaces. 

Any workplace while acquiring a new place checks for some basic parameters. Including the location of the commercial complex, ease of accessibility, nearby offices, the security system of the building, cafeteria, etc. Commercial leases take care of the necessities along with a decent interior, meeting rooms, and conference halls. But they don’t understand the comfort and the feel of the office. Employees on average spend 8 hours a day in the office, which means they spend one-third of their day in those pale-looking, monotonous offices.

To solve the problem of dull, traditional-looking walls and rigid cubicle structures, and build an attractive-looking, aesthetically rich, friendly office space, coworking was invented back in 2002.

The concept is simple. No rigid structure, With 100% comfort, and collaboration.

Managed offices take the coworking technology one step ahead and manage all the operations and administration and let the businesses focus on their ventures.

With effective design and A-grade building complexes, a leading coworking expert provides managed offices and offices on rent in all the major cities and entering Tier-II cities.

Though coworking is a newer technology and many businesses are shifting to coworking for operations and setup of offices, this is majorly hampering the real estate and commercial leasing businesses. Stylish yet sustainable office spaces have become the first choice when choosing a place to rent. Unlike commercials, it also provides customizable options.

The 21st-century innovations are all about personalizing things as individuals. 

Shortly, it is already estimated that 40000 coworking spaces will emerge by 2024. It measures the enormous need for coworking spaces but also gives an overview of vacancies in commercial spaces.

To understand the impact of coworking on real estate and commercial leasing, we need to first understand how coworking functions concerning leasing.

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How does Coworking acquire Spaces?

When it comes to working in a coworking space, it may seem like a seamless process. Just book a space according to the capacity of the team and focus on the venture. The coworking companies take care of the rest of the things. Now that technology has evolved drastically, we can even book a spot in a nearby coworking space. Doesn’t need to travel long hours to reach the permanent office.

All of this happens just with a click of a button by booking a desk in a coworking space. But the functioning of the coworking and its management is not as seamless as it seems.

Right from acquiring the appropriate property in a prime location, to reconstructing or renovating it, it goes a lot in creating these flexible and vibrant places.

The main concern of the discussion is how exactly coworking is impacting commercial leasing. How does it acquire properties and manage them?

Well, first of all, unlike commercial leases, coworking spaces are rented through a license to occupy. This means that the coworking spaces simply have a permit to occupy a property and use it. Leasing a commercial space means it is a formal course of action that the owner intends to transfer the interest in the property.

A license agreement is shorter than a lease agreement in terms of duration and it also gives the flexibility to move out quickly. It also gives easy renewal or expansion amendments in case the business want to hire more employees. Lease agreements are rigid in structure and not easily amendable. 

Signing license agreements instead of a lease agreement is the first sign of distress for commercial leasing. Replacing long-term leases with quarterly or half-yearly contracts affects revenue collection. Early eviction options for coworking can even make commercial spaces go vacant for years. It takes time to find a new tenant and finalize a suitable agreement for both parties.

Why are Businesses Switching to Coworking?

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The impact of coworking can be pretty much measured by the revenues of real estate. But if the businesses are choosing a new and still developing concept instead of a tried and tested method of leasing out an office, there must be some genuine concerns about real estate then.

Other than the affordable and agility, there has to be a checklist that is not fulfilled by real estate and that is why businesses are choosing the alternative.

  1. Limitation on Expansion

While signing a lease agreement, the current head count of the company is calculated and additionally, some future hiring is considered. Now with the commercial leases, the structure is rigid in terms of space and expansion. If the business venture is successful and the team size needs to grow, accommodating new hires becomes tedious.

If all the floors in a commercial space are occupied and there is no scope for expansion, to accommodate a big team either needs to lease out a new office in a different place and maintain both offices simultaneously or move out completely and find a new place.

This becomes hectic when all the legal lease agreements are already in the picture. This is one of the major reasons for switching to coworking with early expansion or contraction options.

  1. Hidden and overhead charges

Renting commercial space is an expensive affair. With all the upfront charges of rent and security deposits, there is a hell number of hidden charges that are supposed to be incurred either before moving in or after that. 

Paying as per the square foot for any commercial real estate lease and a portion of your utility costs depending on the lease agreement, parking charges, building maintenance, parking, storage, etc, increases the investment in leasing a commercial space.

Commercial leases give some initial discounts but then increase the basic rent drastically over the years. For example, an increase in basic rent by 10% in the 2nd year of the agreement and so on. For stable and huge companies, this might not be a topic of discussion but for small companies or emerging unicorns, this is a huge nightmare.

  1. Complicated eviction options

There are stories of Google and Microsoft companies that were started in a warehouse or a friend’s garage. Though the time was different, even they had a basic scarcity of funding. With limited funds, should a company concentrate on its venture or pay for the luxurious office spaces? Commercial leasing eliminates all small-scale startups due to their hefty charges. Even if the charges are managed to give a feel of the office environment, evictions are complicated in commercial leasing.

Business risks, economic factors, recessions, or environmental factors like pandemics, etc, there goes a lot while deciding a suitable space for leasing. If the business is suffering losses but the lease agreements are not flexible enough, the venture may go out of business but still have to clear all the dues for the commercial spaces.

This is one of the main reasons for opting out of coworking. The losses can be managed for as long as possible. Coworking provides that kind of feasibility. 

The evictions are painful for the owners as much as it hurts the tenants. The continued flow of revenue is hampered while they have to bear the necessary cost to keep the building up and running.

Benefits of Coworking  Spaces for Real Estate

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Coworking spaces have created a substantial amount of impact on real estate and commercial leasing. But there are some benefits too. The working model of coworking and the number of coworking spaces to be increased rapidly creates a huge demand for real estate as well. Even smaller and standalone buildings are going for coworking instead of retaining the long-term rigid structured lease agreement.

Some of the benefits are –

  1. Ease in finding business – 

The coworking spaces have taken the center stage because it promotes agility and flexible work culture. But it also is responsible to create brand value for the property. Due to the sharing work model, if a list of big names is attached to the property, the demand and the prices of that property go up drastically.

Businesses would want to collaborate with properties that give them a premium feeling and at the same time an understanding that all the requirements would be taken care of for sure.

  1. The flow of potential clients – 

Due to shorter licenses and easy move-out options, more and more companies are switching to coworking. It is said that this is a generation of freelancers. The flow of freelancers and even small-scale businesses or startups is making coworking a profitable technology for managed spaces and real estate space owners.  

This gives a continuous flow of clients for the properties and high occupancy throughout the year.

  1. One model, Profitable for all –

Retention of existing clients if they like the coworking space and overall building profits for the coworking and space owners both. Along with that, a line of potential clients due to marketing and promotion of coworking spaces indirectly makes the real estate property Popular. This model accommodates the needs of big businesses and at the same time provides a pocket-friendly property option for start-ups and small businesses.

  1. Long-term benefits –

Commercial spaces located in prime locations don’t have to worry about attracting businesses as such. The coworking itself is expanding its horizons by setting up spaces at multiple locations. But for that, the feedback of the previous tenants or the existing ones plays a major role. If the real estate properties fulfill all the expectations in one of their properties, it is most likely to attract business for their multiple properties.

All of these benefits can turn into disadvantages in no time if the tenants are not happy with the commercial buildings and amenities it provides.

Also, if the coworking space proves successful, it automatically attracts new clients due to their exclusive marketing strategies but if coworking spaces are not working effectively, it can even lead to huge losses for building or space owners.

Despite some benefits, coworking is impacting the profits and revenues of commercial leases. Due to the rigid lease agreements and high rent, commercial leases were already taking a back seat. The emergence of coworking concepts has made some real estate owners bankrupt. 

The Future of Commercial Leasing and Real Estate

There is no denying that, with the increase in coworking use and sharing spaces becoming a sustainable and affordable option, the future of real estate, and especially commercial leasing is in grave danger. 

Though the need of the hour is changing and adapting new technology and newer methods, commercial lease spaces are not going anywhere anytime soon. For now or shortly, coworking and commercial set-ups are gonna co-exist. Quite because the coworking spaces can fulfill the requirement of a certain set of profession and professionals. For example, IT, banking, the media sector, etc. But what about hospitals, data centers, and research labs? 

They need a very particular set-up for their operation and a dedicated and customized area. 

Changing offices or sharing it with other professionals would not be possible for them or a cost-effective method. For them, they still have a huge requirement for long-term lease agreements and real estate buildings. For them, entering a 5-year or 10-year agreement is an affordable choice as opposed to the cost of their equipment and set-up charges.

In India, tier-II cities are developing rapidly very recently. They are not yet familiar with the concept of coworking spaces and shared offices. They still have and will continue to have a demand for commercial real estate for at least 10-15 years. The penetration of coworking spaces is more prominent in big cities. This also eliminates the extinction of commercial leasing in small or tier-II cities as of now.

Drawbacks of Coworking spaces

You must have already read how useful coworking technology is and how it is overtaking the commercial leasing and real estate business. But there are some drawbacks to coworking technology as well.  So, there are companies that still opt for commercial leasing instead of trying out the new trend of the time.

  1. Collaboration compromises Privacy

Though coworking teaches collaboration and helps create a network of like-minded people, it also takes away the essence of privacy and security. With private offices and leased space, the decisions can be taken by the tenants. Lease agreements come with that privilege. Hallway discussions, impromptu meetings outside conference rooms, basically anything can be done without a fear of privacy compromise or important information discussed out in public.

The schedules, the timelines even the working hours or fun events can be planned without the hesitation of creating disturbances or other working professionals.

  1. Focused vision plans

It might seem difficult, but traveling to the office for work speed up the process almost 5 times. The team sitting together and coming up with a plan or brainstorming together can come up with a decision faster as compared to team members sitting in different locations or working remotely. Also, it is the fastest way to teach freshers and they can meet their seniors and see and learn from them. Working from different locations or using accessible coworking spaces may have its advantages but it certainly delays the vision and mission of the company.

  1. Stability Matters

After a while, every company needs stability, be it a large multinational company or a successful start-up. After the team grows to a certain level, sticking to a permanent location for least entering a 5-10 year lease agreement maintains the stability of the company and provides a permanent office address. Having a complete space for years also tells that the business is doing well and attracting serious prospects. 

Sometimes, having a permanent office address and a whole rentable floor or a building reflects the image of the company. 

  1. Avoid Distractions

50% of high-performing professionals claim that they work better in a quiet space. They are more productive with fewer distractions. Coworking spaces though are a collaborative setup but are prone to noise and chaos. 

Noise seems to be one of the prevalent challenges when different professions are trying to coexist in the same space. Open discussions, business calls, continue phone ringings, or the click-clacking of laptop keyboards can create havoc for working professionals who would otherwise choose a quiet space to work.

Distractions automatically lead to decreased productivity and it can prove to be a huge setback when it comes to meeting deadlines or delivering projects.

Yes, coworking provides a flexible structure, and you can sit anywhere on campus to work, but does that always help to have people working around on the same project can help improve productivity.

Leasing out exclusive spaces or commercial building deals with all such distractions and make the venture work on time and make profits which is kind of the whole point of the debate.

People’s choice: Coworking or Leasing

There are thousands of research and surveys done on the choice of people for their preferable workplace. Millennials without a doubt have a bias towards coworking as they need flexible and creativity-induced spaces to work from. But there are still some upper-level professionals with decades of experience saying they would prefer leasing more than the flexible structure.

Though the commercial leasing structure is monotonous and doesn’t provide a vibrant or aesthetic-looking office, it still sets the tone just as we enter the building. After a weekend, coming back to the office and entering work mode can be pretty much achieved but looking at those pale-looking walls and cubicle structures.

Some fields or professions entirely work on creativity and innovation. They need their employees to be motivated all the time to come up with a novel idea or a new strategy. For them, a colorful office with modern infrastructure and tech-savvy conference rooms can turn the tables. 

For some individuals, sitting in a bean bag and working late at night might ignite creativity. Coworking helps those professionals. But for more professional fields like IT, Banking, etc, there is a suitable decorum of the office which needs to be respected and maintained. Not just for the business owners to feel like people are working in a traditional set-up but also for the people to complete the work in a limited number of hours and maintain a balance.

What can be done to minimize the impact of Coworking on Commercial Leasing?

Due to the switching of many companies to coworking spaces, the revenues of real estate has impacted enormously, especially after the pandemic hit. Now that the majority of the companies have adopted the hybrid structure, renting out a huge space adds up to the existing expenses rather than minimizing them. Even if the employees are working from home, their security and maintenance, of them are to be taken care of anyways. 

Balance the expense and the impact of coworking on commercial leasing cannot be reversed completely but some changes in the commercial spaces can help them get back in the marathon. 

Some flexibility in the leasing agreements and easy eviction options can be done as a start.

Other than that, the look and feel of commercial leasing can be improved as much as possible.

This might help employees feel motivated and it ignites creativity to some extent.

Expansion or renewal options need to be accommodated. Some discounts should be given to small-scale businesses and provide them with a platform for a professional setup. A few changes here and there while maintaining the decorum of the space, can help the productivity of the employees. 

A proper marketing strategy for promoting the new version of the commercial spaces can be thought of.  Usually, people have a perspective that a commercial lease means an old office with just the necessary equipment but not anymore. Many of the commercial spaces have already started implementing the above changes and it has so far been fruitful for them. The goal is simple, retain the existing tenants and acquire newer ones real soon.

Take Away

It is said that Change is the only constant and the same applies to commercial leasing as well. The time for an innovative idea concerning leasing for businesses and offices had come. Coworking proved to be a beneficial idea for most companies, young entrepreneurs, and freelancers. Though coworking was introduced to eliminate the leasing rigidity, it ain’t taking out the commercial leasing altogether.

There are businesses and multinational companies that still prefer real estate and leasing.

To curb the drastic impact of coworking on leasing, some modifications can be done to leasing in terms of infrastructure, flexibility, and lease agreements. Only then, coworking and commercial leasing can peacefully coexist at least for a decade or two. 

Coworking space managers are working on making as flexible spaces as possible while maintaining the decorum of the spaces and something that can ignite productivity in younger generations as very upper management professionals so that everyone can be benefited from the flexible and agile structures.

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